Madison tobacco retailer to Uncle Sam: Butt out

"I don't smoke, and I can't stand the smell of cigarettes," says Jason Clark, the founder and owner of Smokes on State, a store that sells a variety of tobacco products and tobacco (wink, wink) paraphernalia.

Clark, a Wisconsin native, founded it and a similar store on the east side in May; he plans to relocate the State Street store to the west side soon. Like many businessmen, Clark did not get involved in the trade for the love of the product as much as for the exploitation of the market. When it comes to cigarettes in the Badger State, the market is too ripe to resist.

In the last few years, cigarettes in Wisconsin have become exorbitantly expensive. A pack-a-day smoker, for instance, often spends upwards of $7 a day on the habit. That translates to $50 a week or $2,600 a year, about half of which goes to state and federal taxes.

Clark's role in the smoking economy is clear: provide cheap cigarettes. He does so. Well, to be exact, he provides cheap "smokes." He prefers not to call them cigarettes. He also calls the large containers of 200 cigarettes he sells "boxes" instead of "cartons."

"The roll-your-own industry wants to disassociate itself as much as possible from the manufactured cigarette industry," he says.

The distinction between Clark's business and mainstream cigarette companies may seem trivial to most people, but it's a distinction that the government must recognize for Clark's businesses to avoid hefty taxes and survive. Clark makes a simple argument: While Philip Morris sells a manufactured product, he sells the customer tools to manufacture the product themselves.

First, Clark sells them raw tobacco in large plastic bags. Then he provides them with cigarette tubes. And most importantly, he "rents" customers the use of the giant $33,000 cigarette-making machine that is the centerpiece of the shop.

It is the job of the customer to pour the tobacco and tubes into the machine, which spits out about 200 rolled cigarettes in just under 10 minutes. Never will Clark do the task for the customer. If he did, he would be testing the very thin line that prevents him from paying the significant manufacturer's tax that Philip Morris and R.J. Reynolds are subject to.

Even more threatening to big cigarette companies is the "pipe tobacco" Clark sells. Many customers choose to roll their smokes with these leaves, which are cut slightly differently than tobacco intended for cigarettes and are taxed at a drastically lower rate than cigarette tobacco. Last year, Congress hiked the rate on cigarette tobacco from $1.10 per pound to $24.78 per pound but only increased the tax on pipe tobacco from $1.10 to $2.83 per pound.

As a result, government coffers are losing out on major tax revenue because of businesses like Clark's. Predictably, state and federal officials aren't happy, and have sought to severely restrict the ability of roll-your-own businesses from operating under such reduced tax burdens.

Last year, the Federal Tax and Trade Bureau ruled that businesses using the RYO Filling Stations had to obtain manufacturer's licenses and pay the same taxes major cigarette makers do. According to the Bureau of Alcohol, Tobacco, Firearms and Explosives, it is the machine, not the customer, that is manufacturing the product, and therefore businessmen like Clark should not be exempt from manufacturing taxes.

Clark and others like him vehemently disagree, pointing to the limitations of his machine when compared to the tools used by large cigarette manufacturers. In the time it takes to make 200 cigarettes at Smokes on State, a machine used in a cigarette factory will have made tens of thousands. Other businesses that own RYO machines have likened them to self-serve coffee grinders at grocery stores. A federal court in Ohio found the argument compelling and granted an injunction allowing these machines to continue to operate without being subject to additional requirements.

Clark says he has not been hassled by any tax authorities, but expects a visit some day from the Bureau of Alcohol, Tobacco, Firearms and Explosives. A spokeswoman with the state Department of Revenue confirms the agency is investigating the situation.

"We're looking to see whether [RYO operations] should be considered manufacturers or not," says Stephanie Marquis. "We want to make sure everybody is paying the right taxes."

Clark says he is offering an affordable option to those hit disproportionately by the cigarette tax: low-income individuals, who are also the most likely to smoke. But Dr. Eric Heiligenstein, a UW psychiatrist who researches tobacco use, says it is the poor who are least likely to take advantage of cheap alternatives to manufactured cigarettes. "The wealthy are more often able to buy in bulk or travel to find better prices," he says.

Clark says he is moving his RYO machine from State Street to the west side because it has better parking and a better market. "Students aren't buying, either because they don't have the money to buy a whole bag or because they have the money and would rather just buy packs," he says.

Of course, price is only part of the appeal of Smokes on State and its sister store on the east side, Smoke This! According to Clark, his product is of much higher quality than that offered by the Marlboro Cowboy and Joe Camel.

"Manufactured cigarettes have 599 additives and over 4,000 chemicals, many of which are known carcinogens," says Clark, who suggests that it is the additives, not the tobacco, that cause so many health problems for smokers.

Heiligenstein says not enough research has been done on roll-your-own cigarettes to fully understand their health effects. However, he is skeptical of the notion that they reduce the threat of addiction or cancer.

"In a study done in Canada," he says, "people who smoke roll-you-own cigarettes were typically heavier smokers and were less likely to quit."